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Australian Dollar Continues Declines

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There were no fireworks during Mario Draghi’s testimony on Monday, with the President indicating that the economic recovery in the euro area is losing momentum, and that announced liquidity measures would begin the process of maintaining price stability.

The most important sentence in the speech may have been this:

“With the purchase programmes, we are starting a transition from a monetary policy framework predominantly founded on passive provision of central bank credit to a more active and controlled management of our balance sheet.”

Such a policy change is similar to those seen in the US and Japan who replaced interest rates as a policy tool with balance sheet management through Quantitative Easing after reaching the zero lower bound. While the foundations of a sovereign debt based QE program are still far from firm, it does seem that the ECB is moving in the direction of making it a reality.

Draghi also addressed the small size of the ABS market in Europe and whether the size would limit an ABS purchase program:

“Is the market for ABS, in particular, sufficiently ample to allow sizeable purchases? Our purchases will include a fairly wide range of simple and transparent ABS collateralised by loans to the real economy. The total stock of eligible securities which is currently outstanding – held in investors’ portfolios or retained by the originating banks – is already sizeable. We are confident that it will grow as a result of our presence in the market. Over time, as our purchases contribute to a normalisation in trading conditions, secondary market and issuance activity will expand in those segments that are currently inactive.”

The Euro fell slightly by a quarter of a cent around the testimony but soon recovered its losses.
The Australian Dollar reacted in a confused manner to stronger than expected Chinese manufacturing data. The HSBC Flash Manufacturing PMI showed that the industry is still in expansion after analysts forecast an even 50.0; the true number proved to be a little stronger at 50.5 though the AUD did not react strongly to the announcement – oscillating up 50 pips, down 50 pips and back up 50 pips before plummeting 100 pips to finish the day at around 0.8840 against the US dollar. Similarly European PMI’s were mixed, leading to a rally of half a cent which soon reversed to finish the day flat.

Still to come this week will be US New Home Sales – expected to show a reading of 432,000 – as well as Durable Goods Orders which are forecast to be 0.7% and -17.7% month-on-month for the Core and Non-Core figure respectively. Speeches by the Governors of the RBA and the Bank of England may also cause some interest on Thursday, however given the AUD’s hasty decline below 90 US cents this month it is becoming less likely that Glenn Stevens will use his speaking opportunities to jaw-bone the currency lower.

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